Wednesday, July 24, 2024

Central bank drops its 2020 growth forecast; worst-case scenario is -12.8%

The economy could contract by 12.8% in 2020 in a worse-case scenario, the central bank said on Wednesday after the publication of revised data confirming that GDP declined almost 20% in the second quarter as Mexico hunkered down amid the coronavirus pandemic.

Presenting the bank’s quarterly report for the April-June period, Bank of México Governor Alejandro Díaz de León said that three different forecasts have been developed due to the uncertainty about how the pandemic will evolve in coming months.

In the best-case scenario, the economy recovers quickly from the second-quarter slump and damage is limited to an 8.8% decline in GDP this year.

GDP falls 11.3% in 2020 in an intermediate scenario while in the worst case the economy suffers a deep U-shaped recession entailing the 12.8% slump.

The bank’s most pessimistic outlook for 2020 is 4% worse than its previous worst-case scenario forecast of an 8.8% contraction in 2020.

In all three updated scenarios, the Mexican economy contracts this year by its largest amount since 1932 when GDP plummeted more than 14% amid the Great Depression.

In an interview with the newspaper El Financiero after the national statistics agency Inegi published revised data showing an 18.7% contraction in the second quarter compared to the same period last year – 0.2% better than the preliminary data result, Díaz noted that the economy began to show signs of recovery in June, the month in which nationwide coronavirus restrictions were replaced by state-by-state rules.

Economic activity increased 8.9% that month compared to May but was still 13.2% lower than in June 2019.

Díaz said that if the economy continues to grow in a similar vein throughout the second half of 2020, “a more vigorous recovery” can be expected in 2021.

However, the central bank governor said that “it is clear that the economic recovery next year won’t be enough to return to the levels [of economic activity] we had at the end of 2019.”

The economy will grow by 5.6% in 2021 in the best-case scenario, the Bank of México said in its report, while in the worst-case scenario GDP will only rebound 1.3%.

Díaz said it is unclear how long it will take for the economy to get back to pre-pandemic levels but many analysts predict that it will take several years.

Alonso Cervera, chief Latin America economist for Credit Suisse, and Ernesto O’Farrill, president of the brokerage firm Bursamétrica, both predicted that it will be 2025 before economic activity returns to pre-pandemic levels.

Joel Virgin, chief Mexico economist for French bank BNP Paribas, was slightly more optimistic, forecasting that GDP will recover to pre-coronavirus levels by 2024.

The Bank of México also provided updated forecasts on Wednesday for employment, inflation and the nation’s current account.

It predicted that a total of between 1.1 million and 1.75 million jobs will be lost this year, an improvement compared to its previous forecast in which it anticipated the loss of 1.4 million to 1.8 million positions. The central bank predicted that 100,000 to 450,000 new jobs will be created in 2021.

The bank increased its end-of-year inflation forecast to 3.7% from 3.5% and predicted a current account deficit in 2020 of US $5 billion to $6 billion. It previously forecast a current account deficit of between $3.1 billion and $15.1 billion.

Asked about private sector surveys that found that Mexico is likely to lose its investment grade sovereign credit rating in the next one to three years, the Bank of México chief told El Financiero:

“I believe that it continues to be a possibility: it’s not a certain scenario and it should be avoided to the extent that is possible through the adoption of policies that can provide greater stability, certainty and solidity to the macroeconomic framework and in particular public finances.”

Source: El Financiero (sp) 

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